FDIC sues executives of failed Lynnwood bank

SEATTLE — The feds are going after former leaders of a failed community bank in a case that’s noteworthy for the alleged hubris of the defendants.

The Federal Deposit Insurance Corp., which oversees banks on behalf of consumers and insures deposits, is seeking $41 million from two former executives of Lynnwood-based City Bank, which failed in 2010.

A 97-page professional-liability lawsuit filed in U.S. District Court here alleges the executives “breached their fiduciary duties to City Bank and were negligent and grossly negligent by, among other things, approving, in violation of the City Bank loan policy and prudent, safe, and sound lending practices, at least 26 loans” to 14 unnamed borrowers from 2005 to 2008.

The defendants are Conrad D. Hanson of the Eastside suburb of Clyde Hill, the president and chief executive officer who founded City Bank in 1973; and Christopher B. Sheehan of Lake Forest Park, a senior vice president who oversaw construction loans.

FDIC lawsuits against professionals and board members are fairly unusual, although some 54 similar cases have been brought nationwide since the mortgage crisis of the late-2000s. Two similar lawsuits in this state led to settlements in 2012 surrounding the failures of Westsound Bank of Bremerton and the Bank of Clark County in Vancouver. More famously, executives of Washington Mutual settled with the FDIC in 2011.

Defunct City Bank, says the lawsuit, focused on commercial real estate and what is known as ADC lending — loans for acquisition of property, development and construction.

Even after the housing bubble burst in 2006, the lawsuit states, Hanson and Sheehan personally approved City Bank loans worth tens of millions of dollars for developments involving mostly single-family residences — routinely doing so with insufficiently documented due diligence and on behalf of borrowers who had few if any assets against which to secure the loans.

In a couple of cases, the FDIC alleges, loans were made so borrowers could make overdue payments on previous loans — again, with the borrowers having little or no collateral.

“Rather than exercising caution as they plunged the bank deeper and deeper into ADC lending,” the lawsuit states, “defendants instead relied upon informal and autocratic procedures to approve loans. Hanson and Sheehan stated to bank underwriting personnel that City Bank was the ‘bank of last resort’ and that City Bank was ‘doing deals no one else would.’ In addition, Hanson and Sheehan told bank underwriting personnel that the two of them ‘knew the dirt’ and did not need appraisals.”

The lawsuit says City Bank executives failed to heed the repeated admonitions of bank examiners, who warned that the bank’s practices had led to “ongoing safety and soundness deficiencies that needed to be corrected.”

While the bank continued to make questionable loans in defiance of regulators, Hanson and Sheehan “received an exorbitantly high level of compensation for which there was no justification,” the FDIC says in the lawsuit.

From 2006 to 2008, Hanson received $3.7 million in performance bonuses on top of a salary that ranged from $544,416 to $650,000 per year. During the same period, the FDIC alleges, Sheehan received bonuses totaling $653,000 on top of a salary that ranged from $158,108 to $182,108 per year.

In 2006, Hanson wrote members of the board: “I’m asking each of you individually to also examine if you’re comfortable with my style … because it has now worked for +/- 32 years. If you are of the opinion and uncomfortable some third party might take issue with the business of the bank, you also can resign. If the heat in the kitchen gets too hot, it might be best to get out of the kitchen.”